The first step in creating a contract for a loan is deciding on the type of payment plan that will be offered. One option is to provide an installment loan that doesn't require the payment of interest. In this situation, the person borrowing the money must pay back the amount of money loaned in equal payments over the period of time specified in the contract.

Another option for repayment is a lump-sum payment. In this situation, the borrower must pay the full amount borrowed, along with any required interest, in a single payment. After you have decided on the terms of the loan, you will need to draft a promissory note. This document should include the names of the borrower(s) and lender(s). At the start of the note, make sure to include the address of the borrower(s) and the lender(s).

Within the promissory note, you will want to outline whether the terms are negotiable. This statement should clearly state whether the borrower or lender has any flexibility with the lending or repayment of the money.

  • To make the terms negotiable, simply state that the note is negotiable.
  • For a non-negotiable promissory note, make sure the contract includes the words “this note is non-negotiable."

Next, you will need to make sure that the contract includes the provisions for payment. This section can follow the statement of negotiability and will outline what type of loan you are offering to the borrower. Examples include installment loans, lump-sum payments, and other options, with or without interest.

Late Payment Clause

From there, you may want to include a clause that talks about any penalties that come with paying later than what the terms outline. Not all types of loans require a late payment clause. However, if you want to protect yourself by ensuring that you will receive compensation if the borrower repays the loan later than what was agreed upon, you may wish to include this clause.

If the loan will have an interest-only or installment payment option, you may want to include a statement that outlines the provision for a late payment. For example, you could include something like, "If any interest-only or installment payment as outlined under this note is not received by the lender within [number of days of grace period], the borrower is responsible for paying a [percentage] late fee, which will be multiplied by the monthly payment amount. The borrower must pay the late fee immediately."

You may choose to include an acceleration clause as part of the late payment provision, as well. An acceleration clause allows you to demand that the borrower must pay the amount in full immediately upon paying late. An example of language for an acceleration clause is, “If any interest-only or installment payment is not received within [number of days of acceleration grace period] after the due day date, the lender may demand that the entire amount of the principal that has not yet been paid be given to the lender immediately."

After any late payment clauses, the contract should include the addresses where payments and notices will be sent. The payment address would be the address of the lender, while the notice address would be the address of the borrower.

Secured vs. Unsecured

You will need to determine whether the loan amount is unsecured or secured. Unsecured means that the support for the loan amount comes from the credit of the borrower, not by any required collateral. A secured loan has some type of collateral attached. If the borrower in a secured loan defaults on the payments, the lender can retain possession of the collateral as a way to be repaid.

How to Demand Payment in a Letter

If you need to demand payment on a loan, you will need to write out the demand in a letter. Start by outlining the reasons and what happened in the situation. The other party may be aware of what has happened with the loan, but it's always helpful to have a written description with plenty of detail. If you have to take the other party to court, the letter can serve as evidence. The judge wouldn't be aware of the circumstances around the loan.

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